No Curves Thrown Here

short- or long-term bonds, Lay recommends that you first check out the yield on the Fed funds rate, a benchmark for bond investors, which is currently 5.5%. According to Lay, two-year Treasury notes typically trade about 75 basis points, or .75, above the Fed funds rate. Currently, though, two-year Treasuries are trading at about .25, a sign there’s “no value in the shorter bonds,” says Lay.

Meanwhile, Lay says longer maturities currently look like a bargain, even after yields on the 30-year Treasury have fallen from 6.7% to 6.05% recently. Lay, who notes that the 30-year Treasury has historically paid 5% interest, says long-term rates should decline from current levels. “In my opinion, long-term interest rates are going to go down dramatically as inflation fears subside here in the U.S., and as the balanced budget agreement limits Uncle Sam’s need to borrow,” he says. “During the coming year,” he predicts, “30-year interest rates should fall to around 6%, if not lower.”

If Lay is right, you’ll get a whole lot more bang for your buck with long bonds, or those that mature in 10 years or more. But remember one thing before you buy: experts say it’s best to invest money you’re trying to protect from losses in short-term Treasuries because bonds that mature in 10 years or less typically incur less risk. Also, it’s good to choose a maturity that ties into a specific goal you have in mind — say paying for your kid’s education in 10 years.